Good afternoon. Welcome to the Morguard North American Residential REIT Q2 conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. Note that this conference is being recorded on Thursday, July, 27th, 2023. I'd now like to turn the conference over to Paul Miatello, Senior Vice President. Please go ahead.
Hi. Thank you, good afternoon, everybody, thanks for joining us on our Q2 results conference call. I'll just do a quick introduction to everybody that's joined us from management today. We have Rai Sahi, Chairman and Chief Executive Officer, Beverley Flynn, Senior Vice President, General Counsel, Angela Sahi, Senior Vice President in charge of Canadian operations, and John Talano, Senior Vice President in charge of US operations. We've also got, of course, Chris Newman, our Chief Financial Officer, I'll turn it over to Chris for some initial comments before we go to a Q&A. Chris?
Thank you, Paul. As is customary, I'll provide some comments on the REIT's financial performance and financial position. In terms of our financial position, the REIT completed the Q2 of 2023, with total assets amounting to $4.1 billion, higher compared to $3.9 billion as at December 31st, 2022, mainly from acquisitions completed during the Q1 and from a fair value increase on the REIT's income-producing property, as rent growth continues to drive higher values in both the U.S. and Canadian portfolios.
REIT finished the Q2 with approximately $40 million of cash on hand and $100 million available under the REIT's revolving credit facility with Morguard Corporation. During the quarter, the REIT completed the refinancing of two U.S. residential properties at an interest rate of 5.06% for terms of 10 years, providing additional net proceeds of $20.9 million. During the quarter, the REIT completed a CMHC financing at a property located in Toronto at an interest rate of 4.18% for a term of 10 years, providing additional net proceeds of $36.6 million.
The REIT completed the Q2 with $1.5 billion of long-term debt obligations. As at June 30th, 2023, the REIT's overall weighted average term to maturity was 5.2 years, an increase from 4.9 years at December 31st, 2022.
The weighted average interest rate increased to 3.65% from 3.5% at 31st December , 2022. The REIT's debt-to-gross book value ratio was 38.4% at June 30th , 2023, an increase compared to 38% since December 31st, 2022. Subsequent to quarter end, the REIT entered into binding agreements for the refinancing of two U.S. residential properties at an interest rate of 5.66% for terms of eight years, providing additional net proceeds of $12.2 million U.S. dollars.
Once closed, the REIT's next scheduled mortgage maturities are in July of 2024. Turning to the statement of income, net income was $87.5 million for the Q2 , compared to $166 million in the Q2 of 2022.
The $79 million decrease in net income was primarily due to the following non-cash items: a lower fair value gain on real estate properties of $46.5 million relative to the gain recorded during 2022, a lower fair value gain on the Class B LP units of $46.2 million, which is partially offset by a decrease in deferred income taxes of $13.7 million. IFRS net operating income of $53.5 million for the Q2 of 2023, an increase of $11 million or 26% compared to 2022.
The change in foreign exchange rate increased NOI by CAD 3.4 million of the overall variance to last year. On a same-property proportionate basis, NOI in Canada increased by CAD 2.2 million or 16%, mainly due to AMR growth and lower vacancy. NOI in the US increased by $1.1 million or 6.4%, as an increase in revenue from AMR growth and ancillary income was partly offset by higher vacancy and an increase in operating expenses. The change in foreign exchange increased same-property proportionate NOI by CAD 1.5 million.
Interest expense increased by $6 million for the Q2 of 2023 compared to 2022, primarily due to an increase in interest on mortgages of $2.9 million, mainly resulting from higher principal and interest rates on the completion of the REIT's refinancing and the net impact of acquisitions and dispositions, as well as a lower non-cash fair value gain of $3 million on the convertible debentures conversion option.
The REIT's Q2 performance translated into basic FFO of $23.7 million, an increase of $3.9 million or 19.6% compared to 2022, and on a per unit basis, FFO was $0.42 per unit for the three months ended June 30th , 2023, an increase of $0.07 compared to $0.35 per unit in 2022.
The increase in FFO per unit was due to the following: On a same-property proportionate basis in local currency, an increase in NOI, partially offset by an increase in interest expense and trust expenses, had a CAD 0.03 per unit positive impact. In addition, the change in foreign exchange rate had a CAD 0.02 per unit positive impact.
The impact of acquisitions and a disposition of properties had a CAD 0.03 per unit positive impact, and a decrease in other income, primarily from a decrease in interest income earned on the Morguard Facility, had a CAD 0.01 per unit negative impact. The REIT's FFO payout ratio continued to decline to 42.5% for the quarter ended 30th June , 2023, a very conservative level, which allows for significant cash retention.
Operationally, the REIT's average monthly rent in Canada increased to CAD 1,631 by June 30, 2023, a 4.2% increase compared to 2022, reflecting the quality of our Canadian portfolio. During the Q2, the Canadian portfolio turned over 4.8% of total suites and achieved AMR growth on suite turnover of 22.8%.
In the U.S., same property AMR increased by 9% compared to 2022, having an average monthly rent of $1,784 U.S. dollars at the end of June 2023, as the REIT continued its strong performance, benefiting from solid market fundamentals across many regions. The REIT's occupancy in Canada finished the Q2 of 2023 at 98.4%, compared to 95.2% at June 30th , 2022.
Rental market conditions remain strong and stable as housing demand continues to outpace supply. Same property occupancy in the U.S. at 95.1% at June 30th, 2023, was lower compared to 96.4% at June 30th, 2022. Management expects leasing activity to maintain stable occupancy levels as we continue through the busy summer leasing season.
During the six months that ended 30th June, 2023, the REIT's total CapEx amounted to $14.7 million. That included revenue-enhancing in-suite improvements, common area, exterior building projects, mechanical, plumbing, and electrical, as well as garage renovations. At this time, I'll turn the call back over to the moderator for any questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. Questions will be taken in the order received. Should you wish to withdraw your question in the queue, please press the star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. one moment, please, for your first question. Your first question online comes from Jonathan Kelcher from TD Cowen.
Thanks. Good afternoon. First question, just on the, the U.S. markets. Wondering if you're seeing any of your markets being more impacted by new supply versus any others? One I'm particularly looking at is Texas, where it looks like the occupancy was down both year-over-year and as well as from Q1.
No problem. Jon, we'll turn it over to you, to answer that question on the U.S.
Sure. We've definitely had some turnover in Texas. I would say more of that was related to contracts and timing. It's really a big IT group that is in the Las Colinas area, where the bulk of our apartments are. Those contracts have since renewed.
We have folks from out of country, really all over the world, that go to that area, and it's very high tech. That did dip, but it's absolutely come back. Our immediate markets are more mature than I would say, you know, a lot of what you see or you're, or what you're hearing about is on the outskirts of the loop. In our case, we're inside that loop where there's higher barriers of entry and more stability in general.
We've definitely had some higher turnover that we've been dealing with. It's certainly not been a struggle by any stretch of the imagination. I would say it's getting back to more normal operations, pre-pandemic operations. Certainly not something. We're watching it. It's not something that we're super concerned about.
Okay. Now, you're talking mostly about Texas there. Now, Is that kind of a general statement you can make for the majority of the portfolio?
I would say Texas is one place that we're watching more than most. Chicago's been very good over the summer. We did have a high number of renewals in our downtown markets, but those are absolutely turning quickly, so we've seen some positive results over the last several months. I'm actually in our Colorado markets now, and we're 100% leased at one of our properties and, you know, really still pushing rents. Our renewals just went out for the last or for the next three months, and we're pushing 5%-8%. You know, that's absolutely good news.
We've had some turnover, I would say, in Atlanta, not really supply related, more related to COVID eviction restrictions and folks that hadn't paid for, you know, literally years, that we weren't able to move out. We are doing that now in North Carolina as well as in our Atlanta markets.
We've dipped a little bit there, but it's moving out non-payers for folks that are actually paying rent. You know, we're pushing rents there as well. You know, still getting increases in those markets. I would say Florida is an opposite market. It slows considerably in the summer. We're still doing very well there in all of our REIT-held assets. There is pressure in certain parts of the cities.
I would say, again, for our portfolio in Florida, a lot of it is suburban. Most of the development, specifically in Fort Lauderdale, there's been a lot of development, in the CBD, in the urban markets. That has been definitely seeing some pressure now, but that's just not, not a problem for us.
Okay. That's very helpful. I guess, switching gears and moving to Canada, the uplifts on turnover is based on where you're seeing mark-to-market, is that something, given the low amount of turnover, is that something you can see going on for the next, I guess, even couple years?
Yeah, I expect that. Angela, if you want to, you know, add some other notes to that. Yeah, the, the turnover is so low that, you know, just every year, just, you know, it creeps up every single year at, you know, 5%-10%. Angela, anything else to add on that?
Yeah. I mean, right now, during the summer months, we are seeing a little bit more turnover, just with some students and just in terms of that seasonal leasing activity occurring. We are seeing more turnover right now. For the next quarter, it should be a little bit higher. In terms of the rental increase on turnover, that's pretty significantly up compared to anything even pre-pandemic that we've seen.
Thorncliffe Park is over 40% in terms of uplift on turnover. In Mississauga, we're achieving close to almost $3 a foot on turnover on some of the units that are about 650 sq ft, for example. Rent uplifts on turnover is quite strong, and that's just a factor of immigration and just low supply of rental product, especially given the interest rates, where they're at in terms of limitations on buying.
Okay. What about the, Like, how aggressive are you being on pushing rents on turnover?
They're actually market is being adjusted on a monthly basis at this point. It's quite aggressive.
Okay. That's it for me. Thanks. I'll turn it back.
Thank you. Your next question online comes from Dean Wilkinson from CIBC. Please go ahead.
Thanks. Afternoon, everyone. Just with the post-quarter debt financing on the U.S. properties, you're sitting on CAD 55-ish million of cash. Maybe, I guess, the question for Ray is, when you look at that money, how, how would you prioritize that spend? Is it paying down further debt? Is it buying another asset, or would you look at buying back units? Like, what's your preference with sort of that, let's call it, a war chest?
Bob, you want to handle that?
Yeah, sure. I mean, I think, you know, notwithstanding good results, I mean, I, I think we're still sort of in, in a phase, especially when you look at, you know, globally, some of the things going on around the world, where we're preserving a little bit of cash.
Mm-hmm.
Acquisitions could happen, Dean, but I would say we're probably being pretty careful about things at this point. We've been active on the NCIB, we'll continue to be active. Debt reduction isn't a big priority right now, but it is something that we're considering. Maybe just coming back to your question, it's probably more NCIB, and then after that, a split between acquisitions and debt.
Yeah, I guess the NCIB is the clearest and easiest path of accretion. When you look at potential asset acquisitions, are you finding U.S. looks better over Canada in terms of cap rates and financing, or so that large mark-to-market opportunity that exists in Canada make perhaps some of those potential acquisitions more attractive?
Yeah, I think we're still, you know, we're still very actively looking at both sides of the border. You know, same old story, limited availability in Canada. You know, rates, you know, interest rates are obviously bouncing around, so, you know, there's still some pricing discovery that I would say is ongoing in the U.S., which is making it more and more difficult to find accretive acquisitions in the U.S.
Got it. Makes sense. That's it for me. Thanks.
Thanks.
Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star followed by one. Our next question online comes from Jimmy Shan from RBC. Please go ahead.
Thank you. Just to follow up on the investment market, I wondered if you could provide a little bit more color on, you know, what are you seeing in terms of asset pricing? You know, for the assets that are actually trading and kind of also the kind of level of interest that you're seeing on if you are out there bidding on assets, both Canada and US. And if there's any particular difference that you're seeing between the two markets?
John, do you wanna talk a little bit about, you know, what you're seeing in the U.S. on the investment side?
Sure. Well, I think we've experienced it. What I've found in the markets where we've acquired, you know, most recently in Chicago, is that there are owners out there that need to sell, whether it's to refinance another property or some other purpose. The demand's there. I think pricing is still strong. You know, I think we believe that things might come down a hair more as time goes on, if interest rates, you know, still stay where they are. There just hasn't been nearly as much activity as there was, you know, six months ago, 12 months ago. It certainly has slowed significantly. I think a lot of people are in wait-and-see mode.
We're in a very good position where we could acquire. We're looking for opportunistic assets and situations. You know, when we find them, we talk about them internally. There hasn't been any that have made great sense in the last few months. We're looking, you know, consistently and mainly in our existing markets to further our clustering strategy.
I guess I would add to that on the Canadian side, and I'll start, unless if Angela has anything, she can jump in. You know, we are seeing, you know, trades on cap rates that are moving up, and obviously, you know, that adjustment has happened. You know, there's big variations in quality of the assets, I would say, but again, limited trade is still kind of the issue in Canada. I don't know if, Angela, do you want to add anything on the investment market?
Yeah, no, I agree with you. I think that cap rates have come up a bit, given where interest rates are. It depends region to region. Obviously, Calgary, Edmonton and GTA are gonna have different numbers, but we'll continue to look at everything that comes across, which there isn't that much trading these days, it seems like.
Yeah. On Canada, when you say cap rates are up a bit, but the values actually come down, or, or is it that the NOI to, or at least the potential to reach market at some point, the underwriting NOI has also gone up to, price per door, it looks about the same? Just kinda how, how you think about that?
Yeah, I would say price per door is kind of level. I mean, obviously, you know, I think underwriting or underwritten income or, and cash flow in the assets is obviously on the way up as well, you know, kind of across the markets we're seeing kind of strong markets across the country.
Okay. Just on the US portfolio, what are you getting in terms of base growth on new leases versus renewal, sort of in the quarter or going into the summer here?
John, do you want to take that?
Yeah, I would say it depends on the region. We've had a lot of turnover in Chicago. We had a lot of new leases come up in that particular region, so those have been relatively flat. You know, we have seen increases of 1% to 3%. We still have some room though, between our existing leases and markets. We are pushing those where we can so that, you know, I would say on average, we'll be 3% to 5%. And then, in other markets, as I mentioned earlier on the call, you know, we just did our renewals in Colorado, and those are at 5% to 8%. We're still seeing really good numbers. It is not what it was like last year.
Our rate of increase has definitely slowed, but I would say it's normalizing. It's where we're going back to our historical increases. At the same time, we're really focused on turnover, so we're working hard to keep our turnover low because those costs have gone up as well. We're trying to find that balance to get the increases where we can, but maintain those good residents and that high level of consistency and community throughout the portfolio. It's been good. It certainly is not what we've seen over the last several years, but we're doing well through it.
Okay. Thanks, guys.
There are no further questions at this time. Please proceed with closing remarks.
Okay, thanks, everybody, for joining us. We look forward to speaking to you next quarter. Thank you.
Thank you, ladies and gentlemen. This concludes your conference. Please disconnect your lines.